An ethical person - like a politician, banker or lawyer - may know right from wrong, but unlike many of them, a moral person lives it. An Americanist first already knows that.
Bankers and their government agents will always act in their own best interests. Any residual benefit flowing down to the citizens by happenstance will just be litter.

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Friday, March 27, 2015

Brazil: at Cusp of Monetary Apocalypse

Brazil: Victim of Vulgar Keynesianism

All
Keynesian roads lead to stagflation. That was the case in Europe and in
the United States in the 1970s when both stagnation and inflation hit
the economies at the same time. Currently, this is the case in Brazil.

Since
coming into power in 2003, the Brazilian labor government has
religiously implemented the economic policy doctrine of growth by
spending. Now, the country has fallen into stagnation with a recession
looming while inflation is on the rise. All economic indicators flash
red lights: from economic growth to inflation and the exchange rate,
from productivity to investment and industrial production.

Booms and Bubbles, Brazilian Style

Once
again, Keynesian policies have led to stagflation. Reality has finally
set in. The illusion of easy wealth is shattered. The Keynesian wonder
weapon has become impotent. The economic policy teams at the Ministry of
Finance and the Central Bank have no notion what to do now. After all,
they know of no other economic policy doctrine than to stimulate the
economy by spending ever more. Yet with the government’s coffers empty
and inflation high and rising, the policy tools of deficit spending and
monetary expansion have run out of fuel. Favorable external conditions
such as the China boom and high demand for commodities had benefited the
Brazilian economy during the presidency of Luiz Inácio “Lula” da Silva.
These external factors together with massive internal stimuli
accelerated economic growth. With the end of the commodities boom and
the slowing of economic growth in China, the external environment
factors no longer helped when at the same time internal consumption hit
the wall, as consumers had to scale back along with the government as
the debt burden approaches its limit.

In early 2015, it became
obvious that the country has lived in an illusionary world under the
Labor Party over the past twelve years. Now it seems like a joke that
President Lula once announced that Brazil’s economy was about to
overtake that of the United Kingdom and from then on move upward on the
ladder of the large economies. Yet when it was announced in 2007 that
Brazil was to host the Soccer World Championship in 2014 and when in
2009 the Olympic Committee selected Rio de Janeiro for the Olympic Games
in 2016, it seemed that the much-wanted international recognition of
the president’s achievements had arrived. The jubilation at home was fully matched by the exuberance abroad about how Lula would lead Brazil into the twenty-first century.

Just
as much as many Brazilians did not want to recognize, foreign
observers, too, shut their eyes to the fact that the Brazilian Labor
Party has been practicing one of the crudest forms of Keynesianism. The
Brazilian kind of Keynesianism is deeply mixed with the Marxism of Michal Kalecki.
In Europe and the United States remnants of sound economics survived at
the onset of the “new economics,” and later on partially recovered
classical and neoclassical principles. In Brazil there has been an
almost complete victory of “Kaleckian Keynesianism” with most other
types of macroeconomics cast aside.

Can the Government Turn Stones into Bread?

Even
today, the Polish economist Kalecki is still held in high esteem at
some of the most prominent Brazilian universities. The version of
“Keynesianism” that he developed in the 1930s has become the leading
paradigm for economic policymaking albeit this type of macroeconomics
lacks any micro-foundation and is largely void of realistic content. The
Kaleckian version of Keynesianism takes the macroeconomic symbols for
real and by moving them around according to the basic rules of algebra,
the model finally is brought to the conclusion that “workers spend what
they earn,” while “capitalists earn what they spend” (as this theory was
once summarized by Kaldor).

Kalecki
and his Marxist followers consequently decided that when the state
assumes the capitalist function, government could spend the country to
wealth while workers would get their fair share as consumers. Even more
so than Keynes, Kalecki’s gospel preached that its believers could turn
stones into bread. Government spending for whatever purpose combined
with mass consumption promised a most pleasurable way to prosperity.
This promise has been the economic policy principle of the Brazilian
Labor Party government over the past twelve years.

During much of
the two presidential periods of da Silva from the beginning of 2003 to
the end of 2010, the Kaleckian-Keynesian recipe seemed to work. The
Brazilian government under the former trade union leader spent, the
consumers consumed, and the economy grew. All the while, price inflation
remained subdued and the unemployment rate fell. No wonder that
President Lula enjoyed immense popularity during his two terms and that
Lula’s Labor Party would remain in power when his handpicked successor
won the elections for presidency in 2010 and in 2014.

Dilma
Rousseff, however, a politician by trade and former urban guerilla
fighter, had a hard time winning the elections. When running for her
second mandate, dark clouds began to overshadow the still blatant
optimism of the ruling party. In 2011, the economic growth rate began to
fall. The government first brushed it away as a temporary dip, yet when
the rate continued to decline even more in 2012, the government began
to panic. With the election coming up in 2014, the government did what
the Kaleckian-Keynesian recipe prescribes and accelerated even more its
expansive policies. This may have won the election for her, but the
price to pay came in high later on.

Disillusion Sets In

Now,
in early 2015, disillusion has fully set in. People feel cheated by the
false optimism of the government. The corruption scandal of the
Brazilian oil company Petrobras together with the rapidly deteriorating
economic conditions drove over a million of Brazilians to the streets on
March 15 in protest against the government.

What many of the
protesters fail to see, however, is that Brazil needs more than just a
change of government. The country needs a change of mind. In order to
get on to the path of prosperity, Brazil has to discard its prevalent
economic ideology. Brazil has to get rid of its tradition of profligate
government spending and easy money, Marxist-inspired state involvement
in the economy, and the protectionism that had come with the adoption of
Cepalism (the economic policy concept of the Economic Commission of Latin America). Not special circumstances lie at the heart of the current malaise, but wrong ideas about economic policy.

Brazil
needs a huge dosage of economic liberalization to find its way out of
the current crisis. Less state intervention and much more freedom of
doing business must be the first steps. For this to happen a change of
mind is needed. Brazilians must open up to an alternative beyond state
capitalism. Brazil must embrace laissez-faire in order to prosper.

This
task is tremendous and not much different from earlier elections,
almost all parties currently represented in the Brazilian Congress
belong to the left and the extreme left. There is neither a truly
conservative nor an authentic pro-market political party. This situation
is more than peculiar because, as surveys consistently show, most of
the Brazilians locate their political orientation at the center-right
and in favor of free markets.

Marxism Still Dominates the Universities

The
reason for this discrepancy lies in the fact that the left dominates
higher education, particularly in the social sciences, economics, and
law. It is from this group that most political activists come. When the
military dictatorship ended in 1984, the university system fell under
almost complete control by leftists of all kinds. This way, academic
life is ideologically very different from the rest of the Brazilian
society where common sense still has prevailed.

Fortunately,
intellectual evolution is no longer largely dependent on academia. While
the Kaleckian brand of Keynesianism and Marxism still dominates the
universities, a strong libertarian movement is on the rise spearheaded
by the Brazilian Mises Institute.
Young people in particular flock to this site like the proverbial
wanderer in the desert in the search for water. In the past, changes of
mentality took decades and even centuries in order to unfold.

Nowadays,
with the internet, ideas have a market place of their own with free
access for all. It should be easy for the Brazilians to learn that it is
not enough to be fed up with the present government, but it is high
time to transform the country’s state capitalism into a free market
system in order to prosper.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.